Warren Buffett is regarded as the greatest investor of our time, and maybe ever. 100 years from now, investors will probably still be talking about him, and Berkshire Hathaway (NYSE:BRK-B) (NYSE:BRK-A) will probably still be a great company and a solid investment. As of today, it's tied with Wells Fargo Bank, a Buffett favorite, as one of my five largest holdings. However, I'm not buying any more shares, and instead, I've targeted a business some have called a Berkshire in the making: Markel (NYSE:MKL).
Getting harder to beat the market
Warren Buffett has said himself that it's just going to get more and more difficult for Berkshire Hathaway to consistently outperform the market, and I think he's probably right. As a matter of fact, Berkshire Hathaway has only just outperformed the S&P 500's total return, and it has lagged Markel:
Even over the past five years, Markel has been by far the better stock to own, while Berkshire Hathaway has trailed the market's strong bull run:
But I have to give Buffett credit: He's said himself that Berkshire is unlikely to outperform during strong markets, but it should be a source of strength when the market is flat, or performing poorly. One more chart:
Buffett was spot-on with that call. From the peak of the 2007 market, and through the recession (shaded gray) Berkshire Hathaway has been the better-performing investment. So, why am I making this call -- that Markel is the better long-term investment today, with the market at or near all-time highs?
In a word: Growth.
Buffett has called Berkshire Hathaway's size the one thing that will make it hardest to grow Berkshire. One only has to look at Berkshire's investment over the past several years: $26 billion for BNSF Railways; $9 billion for chemical company Lubrizol; about half of the $28 billion Heinz acquisition with 3G Capital; over $10 billion in IBM stock, making it one of four Berkshire stock holdings worth over $10 billion.
I'm not convinced that Buffett, and Berkshire portfolio managers Ted Weschler and Todd Combs, are going to be able to find enough big deals out there to take full advantage of the company's growing cash generation. Even Berkshire's stock buybacks -- something Buffett said he'd never do, before changing course recently -- have done little to grow value for shareholders, only reducing the share count about one-third of a percent.
Markel is 3% the size of Berkshire Hathaway. To put it in perspective, Berkshire could have bought Markel ten-times over with its investments since the BNSF acquisition, plus the cash on the balance sheet today. Simply put, Berkshire's strength is its biggest weakness, and Markel is in the perfect position to replicate what Buffett has done. Most importantly? Markel has the right people in place to do it.
Leadership counts, too
Markel's core insurance business, much like Berkshire's, generates a significant amount of "float," which is the premiums that are paid and kept in reserve to pay out claims. Also like Berkshire, Markel typically turns a profit from its insurance business, while many large insurers actually lose money on their policies, making it up on the profits from investing the float.
So, Markel's profitable insurance business should add even more cash to the coffers, which, when combined with the float, allows Chief Investment Officer Tom Gayner to buy stocks and wholly acquire companies as well through Markel Ventures. Additionally, Gayner is a long-term focused investor, much in the mold of Buffett when it comes to ownership of companies for years. Case in point, the company's top stock holdings have remained essentially the same over the past two years.
Where Gayner differs from Buffett is in portfolio diversity. Berkshire's stock portfolio is made up of about 45 stocks, with the 10 largest positions making up 80% of the total value, making it very concentrated, considering the $106 billion in total value. Markel's $3 billion portfolio is much less concentrated, with more than 100 stocks in total. The 10 largest holdings make up less than half of the portfolio's value.
When it comes to Markel Ventures, the focus is on acquiring businesses that generate significant cash flow and using permanent -- i.e., non-float -- capital, and not debt. The value of these businesses is plain and simply, their ability to add even more cash that can then be reinvested in high-quality businesses. Rinse. Repeat.
Process, process, process
Look, I'm not expecting Markel to become the next Berkshire Hathaway, but the potential is absolutely there. Today, Markel is the size Berkshire was in the summer of 1991, putting Tom Gayner, 52, eight years younger than Buffett was when Berkshire was this size.
I'm not expecting Gayner to get the same kind of returns Buffett has over the past 23 years, but his value process and long-term outlook are incredibly similar. The bottom line is, Buffett's process has worked, and Gayner operates in much the same fashion. It doesn't hurt that Gayner holds 33,000 shares of Markel stock, worth more than $22 million. He's got a lot of skin in the game.
Final thoughts: Buy great businesses at fair prices
Being able to invest with a company with this sort of potential is rare and unique, and I think Buffett would agree. Markel is a tremendous business with fantastic leadership that's also relatively young, yet experienced. While I'm not selling my Berkshire stock, I'm not going to add anytime soon. I'll be buying Markel as soon as the Fool's trading restrictions allow me to.
Jason Hall owns shares of Berkshire Hathaway and Markel. The Motley Fool recommends Berkshire Hathaway and Markel. The Motley Fool owns shares of Berkshire Hathaway and Markel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.